March 13, 2012

A Symbolic Victory Sheds Light On the Ambitions Of Chinese Manufacturers

by editor

Jedidiah Becker for redOrbit.com – Your Universe Online

After a dawdling entry into the Industrial Revolution, the growth of German industries exploded following the country's belated national unification in 1871. Though initially gaining a foothold in European export markets by making cheap knock-offs of high-quality British products, Germany's expanding class of entrepreneurs gradually became more and more ambitious as their stock of capital and technological expertise grew.

By the turn of the century, names like Krupp and BASF had become synonymous with premium quality and cutting-edge technology.

Now, fast-forward through the whole twentieth century and its two devastating world wars, and one finds in 2012 a German economy that still leads the world in innovation and which exports more goods each year than all but one of the planet's 190 or so countries.

After decades of patiently producing toys for the west, Chinese entrepreneurs are increasingly showing signs that they are copying the German formula.

One of the most conspicuous of these indicators was the recent decision by Chinese authorities to replace two Japanese-made jumbo LCD screens in its national Great Hall of the People with a pair of Chinese originals — originals not just assembled in China but designed there as well.

Though largely an officially sanctioned bit of ostentatious symbolism — the Great Hall is, after all, located in Beijing's historic Tiananmen Square and serves as the parliamentary building and official ceremony center for the Republic of China's government — the event nonetheless serves to remind China's western competitors that real change is taking place in international markets for consumer goods.

At a ceremony marking the installation of the monolithic 100-inch HD screens (the world's largest, by the way), chairman Li Dongsheng of the Chinese electronics corporation TCL was anything but coy in hailing the significance of event.

“We have broken through the Japanese and South Korean monopoly of big flat-screen TVs!” he told an excited crowd of Chinese elites that included officials from the Ministry of Commerce, Ministry of Science and Technology, Ministry of Industry and Information Technology (MIIT), and the government of Shenzhen where TCL is located.

Already leading the world with nearly $1.9 trillion in total exports for 2011, the Chinese government is looking to take the country's manufacturing landscape to the next level.

Using an as yet uncoordinated hodgepodge of tactics, Chinese officials have been lending a helping hand to indigenous companies in efforts to help them get a foot in the door of both global and domestic markets for brand-name manufactured goods. The overall goal is to get home-grown companies moving up the industrial food chain and producing high-end Chinese-engineered wares that are able to compete with established foreign manufacturers.

In an effort intended both to give domestic car manufacturers a boost and display national solidarity, China's Ministry of Industry and Information Technology recently issued a new set of rules last month mandating that government officials purchase only Chinese automobiles when using state funds. According to a report last month in the Wall Street Journal, the roughly 14.5 million cars purchased each year by the Chinese government had frequently been imported from German and Japanese manufacturers like Volkswagen, Audi, and Toyota.

Perhaps a more significant aspect of the government's so-called “buy China” campaign has been its increasing support of native industries via favorable legislation and state subsidies.

Yet while a number of competitors have been predictably quick to cry “foul play,” Chinese officials also recognize that shielding its indigenous innovators from established foreign competitors is hardly a long-term recipe for success.

“If Chinese companies want to go global, they can't just compete in a protected domestic market,” director general of high- and new-technology development and commercialization at the Ministry of Science and Technology Zhao Yuhai told Reuters recently.

“That way you will never win the global market. So this concern is unnecessary.”

To date, in fact, only two Chinese brand names have managed to stake out a significant piece of their respective markets on the international level. Haier Group, which makes everything from cell phones to air conditioners and washing machines, commands an impressive 7.8 percent of the global market for 'white goods' — the largest chunk commanded by any single company. In 2005 the company even made a $1.28 billion buy-out bid for the iconic American appliance maker Maytag.

In the realm of computer gadgetry, the Beijing-based Lenovo Group managed to elbow Dell out of its title as the world's second-largest maker of PCs by specializing in mid- to low-end desktops, notebooks, servers and workstation. In 2005, the company launched a successful bid to buy out IBM's foundering personal computer division.

According to domestic and foreign analysts, a big part of the problem has been branding. In recent years, a chain of serious scandals and a flurry of fictitious rumors have plagued various Chinese manufacturers across industries as disparate as toys and tea, earning the country´s manufacturers the reputation of being not just cheap but also dangerous. And once acquired, such opprobrium is stubbornly difficult to shed and tends to affect both innocent and guilty companies alike.

And as though the international stigma of producing sub-standard goods weren't problem enough, Chinese manufacturers face an equally formidable problem on the domestic front.

In a culture in which status and symbols thereof play an inordinately large role in social relations (by western standards), Chinese consumers also tend to shy away from their own native wares, generally viewing them as inferior. In a vicious cycle that has little to do with the actual quality of the products, many Chinese consumers refuse to buy Chinese goods because of the stigma. And because no one buys the products, they seldom have a chance to prove their quality, build a reputation and thereby shed the stigma.

James Roy, a senior analyst with the China Market Research Group, told Reuters that this problem is particularly pronounced in the car industry, where Chinese producers have been struggling to make inroads for years.

“That (perception) is a big hurdle, especially in autos. (Domestic brands) are almost non-existent in large cities like Shanghai or Beijing because no one wants to be seen going lower than a Japanese or a Korean brand,” explained Roy.

The way out of that vicious circle, believe many, is likely to be found largely on the international rather than the domestic front. For domestic consumers, the quality and prestige of a given company is largely gauged by its prowess in foreign markets, a fact that both industry leaders and government official have recognized.

It's in this realm that Zhao Yuhai sees promise as well as room for improvement.

“Some brands have started (to get international recognition), but most need more work,” Zhou told Reuter's Lucy Hornby.

“Of course, there are different kinds of markets, high-end and low-end, and I think brands like TCL are still at the mid-to-low-end stage. But they'll move up.”

And as TCL chairman Li knows, it's all about brands — a fact that his company has attempted to exploit in its international marketing campaigns.

“To fully sell under our own name isn't a question of technology but of marketing. Because if we promote a new brand, our own brand, it would take time,” he explained.

Thus, rather than grapple with the difficult tasks of pushing its own brand-name and slowing acquiring a reputation, TCL has shown a willingness to adapt its name-recognition strategy to local markets, going by one brand in western countries and another in small, developing nations.

“If there is already a local established partner, using their brand is quicker. For our company, the most important is bigger sales turning into greater revenue,” said Li.